The Pegasus hedge fund is down close to 10 percent in 2014 after being up 63 percent in 2013, and the fund managers are not looking for excuses or “moaning about irrationality,” as they say in a recent investor letter.  It’s time to “man up!”  In fact, the fund CEO views an opportunity to invest after a drawdown, seeing. “the current (net asset value) of Pegasus as an opportunity.”

pegasus fund performance

Pegasus Fund’s trading loss

Reflecting on a trading loss can be painful for a fund manager, the hindsight that comes from experience knowing at the woulda, shoulda, coulda in the portfolio managers mind. May 15 was one such day for Pegasus.  This was “the worst day for long/short equity managers in my career,” he wrote, and “it was also the worst day for Pegasus in our history. It made 9/11 or Lehman look like a walk in the park and yet no planes or banks went down.”

What hurt Clareville Capital’s Pegasus in May? The slide in second line stocks continued throughout May and has kept going into June, an investor letter reviewed by ValueWalk said. The fund was caught on the wrong side of the action, with traditional correlation patterns breaking down. “It is little comfort to us or our investors that this is purely a stock market effect, we are not seeing a slowdown in growth or even a tempering of economic prospects. We have reduced our exposure to the mid cap sector. This rotation will not be helped by investors reducing their books into the summer.”

Pegasus AUM

The letter noted May was an “extremely” macro month and was a more “correlated” month than April. During May the mid cap sector witnessed a “real capitulation” that crested on May 15 and 16. The report noted minimal bounce back from those lows, which “implies to us that many were burned badly enough to leave little appetite to get back in.”

Momentum stocks underperformance

As a benchmark of concern, the letter noted that earnings momentum stocks underperformed to this degree only two times since the bursting of the tech bubble. Looking back on their strategy, the fund managers note that a relative value strategy that correlated well in the past didn’t do so this time around. “We had identified that markets felt like they could have a fall back and had initiated a put strategy during the first quarter. This strategy has done us well in the past as the correlation between the mid cap and the FTSE indices is usually high enough to make them fairly ubiquitous for hedging purposes. As we exited May, FTSE 100 volatility was running near its lows, a very strange situation.”

Pegasus top 10 holdings

After losses less confident hedge fund managers might look to change their strategy.  What is Pegasus going to do? “There is no right answer to this, but many purists would retrospectively like to answer with ‘absolutely nothing.’”.

Pegasus alpha

 

Top holdings for Pegasus in descending order – Wood Group,  Weir Group, Iag, Booker Group, Ocado Group, Advanced Computer Software, Shaftesbury, Redrow, Berkeley Group Holdings, And Rightmove